While new launches and discounts saw the passenger vehicle sales growth hit a five-year high of 7.24% in FY16, auto industry body Society of Indian Automobile Manufacturers...

The passenger vehicle industry has expressed concern and disappointment over the increased taxes in the form of an infrastructure cess ranging between 1% and 4% depending on the vehicle. (Reuters)

While new launches and discounts saw the passenger vehicle sales growth hit a five-year high of 7.24% in FY16, auto industry body Society of Indian Automobile Manufacturers on Friday projected a lower growth of 6-8% for the current fiscal on the back of an unfavourable environment around diesel vehicles and higher taxation due to the infrastructure cess ranging from 1-4%. The projection has been revised downwards from an earlier estimate of 11-12%.

Elaborating on the cut in forecast, Sugato Sen, deputy director general, SIAM, said that the earlier forecast of 11% was based on (economic) models, while the new forecast is mainly a consensus estimate of industry players.

The passenger vehicle industry has expressed concern and disappointment over the increased taxes in the form of an infrastructure cess ranging between 1% and 4% depending on the vehicle as well as uncertainty over the Supreme Court-imposed ban on registration of diesel vehicles with engines over 2000 cc in the national capital region. Sen said that automobiles have become the highest taxed manufactured product. “Additional tax in this Budget dampened sentiment further. Investments on capacity expansion are getting impacted,” he said.

Expressing similar concerns, Maruti Suzuki India chairman RC Bhargava said that an unstable policy regime affects all car-makers. “We do not like frequent changes, in the way government and any other body looks upon what automobile industry should do today and tomorrow. It changes (today) and day after it changes again,” Bhargava told reporters on the sidelines of an event.

Sen also said that many customers are reconsidering their decisions to buy diesel vehicles in the wake of the Supreme Court ban.

According to Rakesh Batra, partner and national leader, automotive sector, EY, “During FY17, the passenger vehicle market is likely to see a muted growth in the first half as a result of an increase in vehicle prices (on the back of higher taxes announced in the Union Budget). However, the market is expected to gather steam in the second half of the financial year due to improving economic environment and a likely reduction in auto loan rates (as banks pass on the interest rate cuts to customers) to close the year with an 8-11% growth.”

As far as FY16 is concerned, the market witnessed a fragmented growth largely driven by new model launches, lower fuel prices and declining interest rates. Rural demand was sluggish on account of adverse economic conditions which proved to be an inhibitor. The vehicle segments that drove overall market growth included passenger cars, medium and heavy commercial vehicles and scooters, while light commercial vehicles and motorcycles pulled down the sales growth.

The uncertainty due to the diesel ban would hit the investment decisions of OEMs, component manufacturers as well as dealers, analysts said. “The impact will be the highest for manufacturers — it would influence the investment decisions. While they may not have a preference of a fuel type or engine capacity over the other, they would want to have clarity as to the long-term position. Not just the OEMs but also the component manufacturers and dealers are required to make investments based on what the market is expected to consume over a long period of time,” Kumar Kandaswami, senior director, Deloitte in India, said.

SIAM’s Sen highlighted that the industry is facing a challenge in the form of unutilised capacities. “Demand is reviving slowly. The profitability for most of the companies continues to be negative. Industry is operating at less than 60% capacity utilisation for more than three years leading to companies losing confidence in Indian market,” he said.

However, SIAM is expecting pick-up in passenger vehicle sales in the second half of the fiscal. The optimism is based on the Seventh Pay Commission payouts along with competitive price offerings by carmakers in the utility vehicle segment.